The Dawdle-Frank Act: Regulators’ missed deadlines

More deadline misses expected in the months to come

By

RonaldD. Orol

WASHINGTON (MarketWatch) — Regulators have missed dozens of deadlines set in the Dodd-Frank Act for adopting key bank reform rules, with many more cut-off dates expected to be ignored in the months ahead.

“These missed deadlines are just the beginning of a trend we will see over the next two years,” said Gabriel Rosenberg, associate at Davis Polk & Wardwell LLP in New York.

Dodd-Frank, approved in July 2010 in response to a financial crisis that shook the economy to the brink, required regulators to adopt hundreds of rules based on the 2,323-page statute mostly within a specific time frame. Hundreds of deadlines were set, mostly to ensure regulators maintain a sense of urgency even as the height of the crisis has abated.

However, an increasing number of deadlines have been missed — many for high-profile, controversial rules — by a wide variety of regulators including the Commodity Futures Trading Commission, Federal Reserve, Securities and Exchange Commission and Federal Deposit Insurance Corp. Rules that will impact mortgage availability, commodity derivatives trading and executive pay packages all had deadlines that have passed with no approval.

According to an analysis by Davis Polk, the number of missed deadlines has been escalating. In the first eight months through March 31, regulators missed four deadlines for writing rules. However, in the subsequent month, April, regulators missed all 26 deadlines for writing rules and didn’t adopt any of the regulations that previously were missed, according to the study.

Regulators have also problems writing studies. The Treasury failed to release a long-awaited report on the future of government-controlled mortgage giants Fannie Mae
FNMA, +33.89%
and Freddie Mac
FMCC, +31.49%
by the statute’s Jan. 31 deadline. However, they missed the deadline by only a few days and released it in February.

More deadlines are expected to be missed. Dodd-Frank set 108 deadlines for rules to be adopted in the third quarter, 78 of which are for regulations the CFTC and SEC must write.

“It is increasingly clear that the CFTC and SEC won’t be able to meet many of the derivatives deadlines coming in July,” said Rosenberg. “While these regulators are working incredibly hard, the task they have been given is monumental and unprecedented.”

The CFTC missed a deadline of April 17 to adopt rules limiting the number of commodity futures and option contracts that any investor can hold in energy, agriculture or metals derivatives. The agency introduced a proposal on the measure, which seeks to curb speculation and potential manipulation, but has so far failed to adopt rules. CFTC Chairman Gary Gensler said in March that the agency is in discussions about finalizing this and a group of other Dodd-Frank rules in the summer months.

A group of bank and securities regulators also missed a statutory deadline of April 17 to approve rules requiring banks to have vested interests or “skin in the game” — namely, by retaining 5% of the risk of loans they package and sell. Internal squabbles over what kind of high-quality mortgages should be exempt from the risk-retention rules delayed the rule writing. The agencies introduced their joint proposal on risk-retention March 29 with no regulation expected until later this year. Read about how bankers are pleased with the 'skin in the game' proposal

The SEC introduced a proposal in November seeking to implement a portion of the Dodd-Frank act that would allow the agency to reward whistleblowers with between 10% and 30% of the sanctions collected if the information leads to a successful enforcement case. Even though the rule was required to be adopted on April 17, it hasn’t been approved yet. SEC spokesman John Nester said the agency’s staff expects the whistleblower rules to be adopted later in May.

The Fed introduced a proposal from the Dodd-Frank Act to cut so-called debit interchange fees, the cost per transaction that retailers pay to accept debit-card payments, by an average of 73% in December. The rule, which could cost banks $12 billion in revenues, was required to be adopted by April 21. Fed Chairman Ben Bernanke acknowledged in a letter in March that the agency wouldn’t adopt rules by the deadline, and it didn’t.

Regulatory observers point out that the statute imposes no punishments if the deadlines are missed. Lawmakers on Capitol Hill could pressure regulators to expedite their efforts — however so far no serious pressure has been exerted.

And to some GOP lawmakers, that’s just fine. In fact, a bill introduced by House Republican lawmakers would delay the derivatives provisions in the Dodd-Frank Act for 18 months. GOP lawmakers argue that a delay is necessary to make sure the U.S. doesn’t impose more stringent derivatives rules than regulators in Europe, which are expected to approve similar rules.

In March, House Financial Services Committee Chairman Spencer Bachus and a group of fellow Republican lawmakers wrote to the regulators that they were troubled by the volume and pace of rule-makings. The letter insisted that businesses and consumer groups are “stymied by the sheer number of proposed rules in the pipeline” and the comment periods.

Democratic Party lawmakers, for their part, don’t seem that bothered either. “As regulators work to put these critical new protections in place it is most important they get it right,” said Senate Banking Committee Chairman Tim Johnson, who now has Chris Dodd’s role now that the ex-Senator has retired.

Some in Washington, however, have expressed concern. Bart Chilton, a Democratic commissioner at the CFTC, recently expressed concern about any postponements and missed deadlines, insisting that “dangers” still exist particularly in so-called “over-the-counter” derivatives transactions. It’s a market that trades outside of transparent clearinghouses mandated in the Dodd-Frank Act.

“I think urgency still exists still today,” said Chilton. “There are dangers out there in the OTC world that we need to get a handle on. There are some that want to run out the clock. Many of these people are people who opposed [Dodd-Frank] to begin with want to run out the clock until the next election. Maybe consumers won’t be as hot on reform then.”

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